Asian stock markets have fallen sharply today on renewed fears over bank losses from the US leveraged loan market and concerns a falling dollar would hit the region’s exporters. Hong Kong shares led losses in Asia, dropping by 3.9%, while the unwinding of the carry trade sparked a surge in the value of the yen. Investors are also wary over reports that HSBC will reveal a $1 billion exposure to the sub-prime mortgage sector when it announces its third-quarter profits this week.
In news that will further galvanize US calls for a faster yuan appreciation, China’s trade surplus increased 13.5% over the last year to a record $27 billion in October. Statistics from the General Administration of Customs show the surplus was $15.4 billion with the US and $13.9 billion with Europe, figures likely to set the background for next month’s third round of the US-China Strategic Economic Dialogue. In other news, the People’s Bank of China raised the bank’s reserve requirement ratio by 50 bps to 13.5%, in an attempt to pacify the country’s surging liquidity. This is the ninth hike this year and the ratio is now at its highest level since 1985. Analysts expect further such measures in the near term but argue monetary conditions will only be effectively managed once the world’s driver of global growth has a positive real interest rate environment and adopts a flexible exchange rate.
Ecuador’s president Rafael Correa vowed a fundamental overhaul of government institutions including the central bank, the Foreign Trade and Investment Council and the telecommunications national council. Correa said he will remove the independence of the monetary authority, but analysts say monetary conditions in the country are unlikely to be fundamentally affected since the economy is dollarized. His announcement follows the resignation over the weekend of six high-ranking officials at the central bank. (For an interview with the country’s economy minister defending the government’s economic agenda, please click here)
Inflation in Slovakia rose to 3.3% year-on-year this month from 2.8% in September, on the back of surging food and oil prices. The country plans to adopt the euro by 2009 but must fulfil the Maastricht criteria, which call for a sustainable price performance. EU Economic and Monetary Affairs Commissioner Joaquin Almunia expressed concerns over Slovakia’s ability to meet this target, which in ordinary circumstances is measured by the average of the three countries with the lowest inflation rate plus 1.5%. At present, there is no consensus among analysts whether this will be achievable. (For more on the challenges of Eurozone convergence in emerging Europe, please click here)
Gabon has been given a BB- credit rating from Standard & Poor’s in preparation for its debut $1 billion 10-year Eurobond. The sovereign plans to uses the proceeds to repay its $1.5 billion Paris Club debt and will be the only second African nation to have launched into the international capital markets after Ghana’s debut bond in October. The issue is due to take place later this month . (For more analysis on this new wave of African borrowing, please click here)